FAQ - 18 May 2016

Q: Currently
people take out insurance to cover shortfalls in medical bills and it is called
GAP cover. It is a payout to cover the shortfall caused by the underpayment by
medical aids. Is this GAP cover taxable?

A: In terms of section 6B (1) ‘qualifying medical expenses’ (for purposes
of the additional medical expenses tax credit) means "amounts (other than
amounts recoverable by a person or his or her spouse) which were paid by the
person”.

The SARS
Guide on the Determination of Medical Tax Credits and Allowances states that
"in order for the expenses to be considered deductible, the expense must not
have been recoverable from the taxpayer’s medical scheme.” The Act
however doesn’t refer to a medical scheme when the word recoverable is
used.

We submit
that the word must therefore take its ordinary meaning. The courts have
only dealt with the words "recover of recoup” – see the Omnia Fertiliser
case. The Oxford dictionary defines recoverable as "(Of compensation or
money spent or lost) able to be regained or secured by means of a legal process
or subsequent profits”. We submit that the recovery under the GAP scheme
will indeed constitute an amount recoverable. .

The problem is that the contributions to the GAP scheme doesn’t qualify
under either section 6A or 6B. We are not sure if the taxpayer would be
able to argue that, at least to the extent that the contributions were made to
the GAP scheme, the will not be seen as a recovery. It comes down to the
onus of proof.

2. Can a
subsistence travel allowance be included in an employee’s bonus structure?

Q: Can a
subsistence allowance (travel allowance) be included as part of an employee’s
bonus structure? If so, where in the legislation can I find this? Could this be
considered to be an anti-avoidance transaction?

A: The principle, as was stated by Judge
Cachalia (in a recent case Anglo Platinum Management Services v SARS) is that
"that salary sacrifice arrangements, whereby employees sacrifice or forego a
portion of their cash salaries in return for some quid pro quo or fringe
benefit from the employer that reduces their tax liability, are perfectly
lawful.”

The same
principle may be applied here, but we fail to see how a bonus can "be
structured to include a subsistence allowance”.

The first
risk is that the taxpayer is faced with the burden of rebutting the presumption
of purpose here – see section 80G of the Income Tax Act.

The next
issue is that an allowance (and we need to say that section 8(1) no longer
refers to ‘subsistence’, but to ‘accommodation, meals and other incidental
costs) is included in taxable income. The amount so included is only
‘reduced’ to the extent of business use where the recipient can prove that the
amounts of the expenses were incurred or that the recipient was in fact away
from his or her usual place of residence.

In terms
of paragraph (bA)(ii)(bb), of the definition of remuneration, such an allowance
is included in remuneration subject to employees’ tax if the person didn’t
spend the night away from his or her usual place of residence.

We fail to see how a
bonus can be structured to include a subsistence allowance.

We based
that on the current practice generally prevailing (which we agree with).
For ease of reference we copied that below:

"The
judgment in ITC 15231 confirmed that when the word "allowance” is used in an
employee-employer relationship, it means a grant of something additional to
ordinary wages. The taxpayer had received a salary and sought to claim a deemed
subsistence expenditure deduction against his salary. The court held that he
had not received an allowance as he had not received anything extra and was not
automatically entitled to the deduction provided for in section 8(1).”

The
principle then is that the meaning of a bonus is distinctly different to that of
an allowance. What we are saying is that a bonus can thus not include an
amount of an allowance.

Disclaimer: Nothing in these queries and answers should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.

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